Auto-component production is forecast to enter steady growth pace in 2016-17, aided by improved demand from vehicle makers.

The turnover of the Indian auto component industry stood at Rs.2.55 lakh crore ($39 billion) for the fiscal 2015-16, registering a growth of 8.8 per cent compared to Rs 2.34 lakh crore ($38.5 billion) in the previous fiscal. Indian auto component industry recorded a CAGR of 6 per cent over the last six years.

Indian automobile industry has reached an important milestone, clocking about 24 million units in domestic production in 2015-16. The commercial vehicle industry that had been facing muted sales has bounced back growing 12 per cent with domestic production crossing 7.8 lakh units. With meteorological department forecasting a normal monsoon combined with government’s push on infrastructure development, overall automotive and tractor sales are to gain momentum.

During this fiscal, the domestic auto component industry is expected to grow in low double digits on back of recovery in vehicle demand.

“Despite a challenging year, the auto component industry has registered a satisfactory growth of 8.8 per cent in 2015-16. Further, while overall exports from India witnessed de-growth of 9.58 per cent, the Indian auto component industry exports grew by 3.5 per cent. With signs of recovery in the auto market in the country and prospects of a better monsoon, the component sector is expected to witness growth in double digits this year,” said Arvind Balaji, President, Automotive Component Manufacturers Association (ACMA).

Industry representatives and analysts pointed out that recovery in the domestic PV market as well as strong double digit growth in M&HCV segment supported OE demand in FY2016, whereas rural-

Rural-dependent segments like LCV, tractors and motorcycle have performed relatively better in Q4FY2016 as compared to previous quarters though full recovery is still sometime away. Supported by the 7th Pay Commission, implementation and

recovery in rural income with a good monsoon as well as overall improved customer sentiments, domestic OE demand is expected to gain a fillip in the current fiscal.

During most part of FY2016, auto ancillaries have benefitted from a steady decline in commodity prices, which has pushed their operating margin to an all-time high. However, most of the commodities, especially steel (after minimum import price restriction) and rubber prices have jumped substantially in the last month. The benefits of commodity prices have peaked out in Q3FY2016 and prices are expected to increase gradually over the next two to three quarters, said rating agency ICRA.

With increasing vehicle volumes in the country, the aftermarket segment grew by 12 per cent in 2015-16 to Rs.44,660 crore from Rs.39,875 crore in the previous fiscal.

Vinnie Mehta, Director General, ACMA pointed out that the performance of auto component industry in 2015-16 was satisfactory. “This is despite a less than expected performance in the passenger vehicles, two-wheelers and tractors segments. With the Make in India initiative and thrust on increased localisation by OEMs, the component industry is actively focusing on delivering enhanced quality products as well as on R&D and innovation,” he added.

Exports hit due to slowdown

Volatility in global markets impacted exports during 2015-16. Exports of auto components grew by 3.5 per cent to Rs.70,900 crore ($10.8 billion) from Rs.68,500 crore ($11.2 billion) in 2015-16, registering a CAGR of 18 per cent in the last six years. Europe accounted for 36 per cent of exports followed by Asia and North America, each at 25 per cent. Exports to Central America and North America increased by 30 per cent and 3 per cent respectively, over the previous fiscal. Exports to Europe, the largest destination, declined six per cent to $3.9 billion, while exports to countries in Asia fell three per cent to $2.7 billion, according to ACMA.

Indian automotive exports have high dependence on the US and European markets, which together accounts for over 60 per cent of the overall auto component exports from India.

The slowdown in the M&HCV segment in the US is a concern for Indian auto component exports; however, healthy growth in the US and the European PV market is expected to offset the same, according to Subrata Ray, Senior Group Vice President – Corporate Rating, ICRA.

But, ICRA expects an increasing thrust on the Make in India initiative, availability of abundant skilled/semi-skilled labour and depreciation of the INR vis-a-vis USD to support healthy export growth over the medium to long term. Nevertheless, the yuan depreciation and a slowdown in the US CV sales would be key challenges for Indian auto component exports in the near term.

Imports continue to haunt

India is a net importer of auto components. Imports of auto components grew by 9.3 per cent to Rs 90,600 crore ($13.8 billion) in 2015-16 from Rs 82,900 crore ($13.5 billion) in 2014-15; Asia and Europe contributed to 58.6 per cent and 30.9 per cent of the imports respectively. China is the leading exporter of components to India; no Chinese automobile company has a manufacturing base here. At $3.2 billion, China accounts for 23 per cent of component import. “Rising import is a matter of concern, though it shows that domestic consumption is growing,” said Mehta.

Emerging domestic opportunities

From directly introducing Bharat Stage (BS-VI) emission norms by April 2020 to implementing advance safety norms in vehicles, the regulatory changes are also likely to present sizeable opportunity for select auto component segments.

Although the proposed safety standards don’t make airbags mandatory, in order to achieve adequate safety ratings for frontal collision, air bags would become a necessary fitment. This will open up a sizeable market opportunity (Rs.19-23 billion by FY2020) for airbag suppliers as its penetration in PVs could increase exponentially from 30-35 per cent.

At present, airbags are majorly imported in India with Takata, Autoliv, TRW, Toyoda Gosei and Samsung being the key suppliers. However, few Indian component manufacturers have also entered the segment through technology tie-up with foreign players. For instance, while Rane TRW (an established player in the steering system space) has started assembly of airbags at its unit in Chennai, Abhishek Auto Industries has entered into collaboration with US-based KSS to set up a unit in India. The import content in airbags currently stands at 60-80 per cent as the key components i.e. inflator and sensors are imported.

Also, growing safety awareness and upcoming new regulations are expected to drive strong opportunity for ABS (Anti-lock Braking System) market in India and is pegged at Rs.6500 crore over the next three years for the Indian auto component industry. With ABS becoming mandatory in 125cc+ two wheelers from April 2018, the domestic ABS market will witness exponential growth.

Two-wheelers below 125cc can either have ABS or Combined Braking System (CBS). For all the existing models, the deadline stands at April 2019.

After making it mandatory for CVs (above 3.5t) from October 2015, the government’s decision is to implement the same in two-wheelers as it is the most vulnerable segment and account for largest proportion of road accidents.

At present, motorcycles (below 500cc) in most emerging markets like India have hydraulic brakes on the front wheel while the rear wheel is fitted with a mechanical cable brake.

Estimates suggest that an ABS unit for two-wheelers will cost about Rs.2000 per vehicle, while a CBS will be priced relatively lower. With an estimated market size of two wheelers at about 25 million units (in FY2020), the market potential for new braking system stands at Rs.42-50 billion (in FY2020).

Thus, over the medium to long term, growth in the auto component industry will be higher than the underlying automotive industry growth, given the increasing localisation by OEMs, higher component content per vehicle and rising exports from India.

“The continuing thrust on infrastructure and revival of mining activities, coupled with the increase in budget allocation for the rural sector and fast tracking of irrigation projects, augur well for the growth of M&HCVs as well as construction equipment. The tightening of emission norms is also likely to spur some advance buying in M&HCVs during the second half of the year,” said TT Srinivasaraghavan, MD, Sundaram Finance Ltd.

He stated that with diesel prices expected to remain stable, the outlook for the automotive sector appears positive and are hopeful of posting reasonable growth.

ICRA projected that the auto-component industry would gain momentum and register growth of 8.5-10 per cent in the next fiscal (FY2017), as against 2.8 per cent during 2015-16, with some traction in the PV and bike segments.

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